Op-Ed: The China Effect — World stocks worried by new mortgage rules

Sydney
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There are two elephants in the financial markets, and China’s recent decision to tighten mortgage lending requirements has sent markets into a nervous dump of stocks. It's not a repeat of the US disaster, but the money involved is equally big.

“The transition from loose to normal monetary policy will be one of the issues that markets are going to have to deal with,” Daniel Farley, senior managing director at StateStreet Global Advisors, which manages $85 billion globally, said in an interview in Singapore. “That’s a great risk. Central banks haven’t gotten the timing perfect.”

The hit to the Asian markets is indicative of how sensitive the world is to Chinese policies. The Chinese property market is one of the world’s biggest, and it has a lot of capital tied up in it. Mortgages can run into the millions in China even for Shanghai apartments. This may not be the same thing as the mortgage securities crash of 2007, but even the whiff of credit issues in China has markets worried.

Note the expression- “Loose to normal monetary policy”. As a matter of fact, China’s new grip on lending may well be necessary, however euphemized. Chinese investment is huge. A lot of that investment, however, relates directly or indirectly to borrowed money. Debt is controlled very differently in China, and macro lending is directly watched by Beijing’s heavy hitters.

The markets have overreacted to a point- The big Chinese banks aren’t in any trouble as far as anyone knows, and problem lending is more of an internal nuisance than a serious macroeconomic issue. Nor is the drop in markets all that unusual. It’s quite common in Australia, for example, to see big money moving in and out of the Australian stock market very suddenly, as Chinese investors take up other stock opportunities elsewhere. The current sales on the ASX are probably mainly Chinese buyers heading back to Shanghai to grab the lower-priced local stocks and reposition.

The problem for China is that having large amounts of borrowed capital in mid-air isn’t always the best option. The Chinese central bank is also stuck with a very big inertial mass of capital assets on the move in the property market. Imagine trying to control the Mississippi with a tea strainer, and you’ll get the idea.

The market isn’t necessarily wrong, however, in one particular area. If lending for property is reduced, that does matter to the rest of the world. China’s efforts to create a Western-style domestic economy could be slowed down, which in turn means demand for Western imports may be reduced. This is particularly important in the construction and related domestic economic sectors.

There’s another issue, too- If China slams on the brakes the wrong way, it could also damage the domestic market. Chinese property prices are extremely high, but with that comes the fact that a lot of capital is tied up in property. Create too many issues for borrowers, and a drop in the property market is the first likely hit to the wider economy. A drop in asset values could be a serious own goal.

It’s more probable that this move is to create a mechanism to manage borrowing while simultaneously trying to ensure that a raft of difficult debt combined with runaway property prices doesn’t accumulate. Successive Beijing administrations have tried to curb bad lending practice, particularly lending for dubious or nepotistic purposes. The historic level of success is debatable, but if there was a real intention to manage borrowing bad habits, this is how it’d have to be done.

The new rules would also qualify as a warning to the market that a big stick is there, tactfully but unambiguously. Beijing may be saying the tap can be turned off, and expecting financial and property managers to take the hint. In the past, they have.

This recent Financial Times video is a good introduction to how economic management by Beijing hits the Chinese market.

This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com